State vs. State vs. State Ad Nauseum

There is a very reasonable editorial today in the Southeast Missourian (link via John Combest) regarding the tax dispute between Kansas and Missouri, over the deductibility of various state taxes. My first thought was that it seemed like some sort of summit between Kansas, Missouri, and Illinois would be an ideal opportunity to hash out this dispute and come up with a solution everyone can live with. But as I thought (that’s what they pay me to do here) about it, I realized it is much more complicated than that. The knee-jerk reaction I briefly had would be for the IRS to come up with rules for interstate taxation. But aside from the fact that this would violate federalism, every state has its own situation and is going to adjust its tax system accordingly. A federal solution would penalize some states and help others by not adjusting to those differences.

It would seem Illinois could work with Missouri on this, because more Illinois residents work here than vice versa, but you also have to consider the number of Wisconsin and Indiana residents who work in the Chicago area (Chicagoland, as they call it). A solution that might benefit residents of the Metro East might hurt Illinois tax collections up north. Play along with me for a moment, as if I cared about a reduction in the state’s tax collections.

Or take Michigan. It’s famous for its property taxes, particularly in the counties and townships along Lake Michigan. Why? Because people from out of state, mostly Illinois and Missouri, own the vacation homes in those lake communities and having a large property tax is a good way for Michigan to fund its governmental entities. They can make it up to the locals in other ways.

Every state and local community is different, and each is going to come up with a unique tax structure to benefit its residents. Missouri has more employees coming into the state to work than leaving it, so Missouri benefits from a structure that realizes this. I am not saying we shouldn’t be good neighbors — heck, I agree with our study that says we should get rid of the state income tax entirely, and the earnings taxes as well. I am saying this is a complicated issue that would best be served by each state folowing an across-the-board low-tax strategy, and coming up with one-on-one compacts in situations where that would best serve the interests of two states that share a surprisingly large number of commuters — be it Kansas and Missouri, or Hawaii and Kentucky.